India's rich are testing its resolve to open up

India's capital control regime is disowning its younger liberal self. The central bank may bar resident citizens from holding offshore deposits with lock-up periods, Reuters reported last month, citing unnamed government sources. That would increase curbs on a scheme meant to ease overseas transfers up to $250,000 a year per individual. It's a suboptimal way to address valid concerns – and reveals a deepening anxiety about outflows.

The Reserve Bank of India in 2015 doubled the amount Indians could send abroad under its liberalised remittance scheme, with no restrictions on the end use of money. It supported those flocking to foreign shores to study, holiday and wed; Indians spent $30 billion overseas during the year to the end of March.

Restrictions have been piling up, however. In 2020, New Delhi introduced a tax on transfers which, after some revisions, now claims 20% of all transactions of over 1 million rupees ($11,667), except medical and educational costs. A 2022 rule change, meanwhile, forces Indians to repatriate or reinvest proceeds from the sale of foreign investments within six months.

The RBI worries about flows into shadier instruments like cryptocurrency and private companies. But outflows under its LRS scheme, while having nearly doubled during the five years to March 31, make up less than a quarter of the remittances India receives from its 35 million-strong diaspora.

Authorities may suspect actual transfers are much higher. For instance, Indians often buy property through shell companies to circumvent the limit: small-town investors are flocking to buy Dubai property, for example. This spending shows up as outbound foreign direct investment, which grew 74% year-over-year to $15.5 billion during the eight months to November, after deducting inward FDI.

It all contributes to a shocking fall in net FDI. This dropped to $500 million from $8.5 billion in the eight months to the end of November 2024 compared to the same period of 2023, Reserve Bank of India data shows. And it slows India's goal of boosting its foreign exchange reserves to ensure it can deal with any future currency volatility as the world enters an era of heightened trade uncertainty.

One option for New Delhi that would appear less like backsliding on a commitment to open up is to link spending limits to reported income. This can target fake outbound investment and money laundering, and is a criterion Chinese authorities use to assess requests for transfers of over $50,000. Such restrictions would confirm India's growing angst about outflows, but it's a lesser evil than complicating a scheme that calls itself liberalised.

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CONTEXT NEWS

India's central bank plans to bar Indian resident citizens from holding foreign currency deposits with lock-in periods, Reuters reported on June 12, citing two unnamed government sources.

The Reserve Bank of India will amend regulations to prevent overseas transfers from being used to park money in time deposits or other interest-bearing accounts abroad, the report added.